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No. Not an .iso. Download Macrium Reflect 6 (a solid free backup/restore program) or other backup program if you don't have one and make a backup of your entire HDD. That creates an image of your system that you can restore at some future time using the same backup program.
Oh good heavens no! What if the hard drive fails? How are you going to use a restore point that is on an inoperable HDD? You should back-up to an external device to guard against the day when such a disaster strikes. Macrium Reflect has you create a recovery disk (cd, dvd, or usb) that starts the computer and the Macrium software so that you can restore your system to a replacement hard drive or to the present hard drive if you just need to refresh everything. This helps when not only Windows but also third-party software gets messed up. A restore point is for recovering from a bad driver or program installation, but does not help for disaster recovery. I use external USB 3.0 and eSATA drives for daily incremental backups and weekly full image backups on all my computers. If you turn on File History in settings it will give you the option of making an image as well as keeping track of the previous versions of your files. The problem with that is that Windows needs to be operable in order to restore the image. What you really need is a backup system that works no matter what happens, even if you have to replace the hard drive itself. Macrium is also good at cloning a system. This is useful if you want to replace your present hard drive with a bigger or faster one. I used it to upgrade two of my computers from HDDs to SSDs. It is very smart when working with SSDs.
Yes. Use the Disk Cleanup tool. Type cleanmgr in Cortana/Search. Disk Cleanup will run once and present you with a list of items it can delete. That will not show the "previous versions of Windows" and you have to click the Clean up System Files button. Disk Cleanup runs again and this time the results window will show the previous versions of Windows entry. Check the box for that and click OK.
You want more space, that will do it. The contents of the windows.old folder is the version of Windows that gave you all the trouble. Toss it.
Reboot and try again. That will probably release the handles on the files that something is trying to access.